What Keeps Hedge Fund Managers Up At Night

Hedge fund managers confront countless economic variables as they pursue twin goals of preserving and growing capital. Of these sundry economic variables, two of the top ten keeping them up at night are undoubtedly declining oil prices and the Asian/European economic slowdown.

Shrinking Oil Prices

As oil prices continue to tumble, the impact on the equities market must be a major concern to hedge fund managers, irrespective of the strategy they pursue. Oil is such an integral component of almost every enterprise imaginable, directly affecting metals, transportation, manufacturing, energy, and indirectly impacting all sectors of the economy.

Of course, the trick is to understand the nature of the impact. Will it be positive or will it be negative? For example, falling gasoline prices serve as a de facto wage increase for consumers. It is estimated that every $10 drop in oil prices translates to a $50 billion annual savings on fuel costs, which bodes well for the consumer goods sector. Similarly, the transportation industry may see windfall profits as fuel prices spiral down. Energy stocks may dip and the solar power industry may be stalled. The already uncertain future for coal may become even worse.

Then we have the geopolitical concerns to consider and how the economies of countries like Mexico, Venezuela and Russia will react … not to mention Iran, Iraq and other oil-producing nations of the Middle East and Africa.

Logically, market forces will eventually stabilize oil prices, but, when, at what level, and at what geopolitical cost? These are the great unknowns hedge fund managers need to nail down.

Asian/European Slowdown

Japan, the world’s third largest economy, is officially in recession. China’s double digit growth has slowed to single digits, and Europe, led by Germany, is fumbling toward recession. While these events have contributed to a stronger U.S. dollar, that in itself has the potential of being problematic for the economy of the United States by making our exports more costly abroad.

Inasmuch as exports account for 13.8 percent of the U.S. economy, a stronger dollar is somewhat counter-productive. However, most economists take the position that neither lower oil prices nor the Asian/European slowdown are sufficient to diminish the U.S. annual rate of growth from its current 3 percent pace.

On the Jobs Front

Although hedge fund closures in 2014 outpaced hedge fund startups, the overall net impact was minimal. Clearly, opportunities will be more robust for job seekers with a strong foundation in oil-related investments. Similarly, job seekers with substantive global macroeconomic experience should also have a leg-up on the competition.

The overall number of hedge funds shrank in 2014 but this was countered by net inflows exceeding $225 billion, which pushed assets under management to record highs. While it cannot be assumed that legions of new hires will be required to manage this surge of investment dollars, it does suggest that the industry is healthy, vital and growing.

As long as this trend continues, there will be opportunities for those with the “right stuff” and, at this moment, the right stuff would be the know-how required to deal with oil, Asia and Europe. In short, everyone who can help these hedge fund managers get a good night’s sleep.